Once again, the farce of so-called SEC “prosecutions” reveals itself. Last Friday, the financial watchdog agency charged six former top executives from Fannie Mae and Freddie Mac with securities fraud for deliberately misleading the pubic about how much money they had invested in high-risk, subprime mortgages. The farce? From the SEC’s website: “Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability.”

According to the complaint, “Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, director of the SEC’s Enforcement Division. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books,” he added.

If the SEC’s complaint is accurate, “misstatements” is a stunningly inadequate description. For example, during an 18-month stretch ending in August 2008, Freddie Mac told investors its exposure to single-family subprime loans was $2 billion to $6 billion. The SEC alleges it was $141 billion at the end of 2006, rising to $244 billion by the middle of 2008.

Yet the defendants are unrepentant. None of the six have agreed to settle with the SEC, and some have promised to fight the charges, according to statements released by their lawyers last Friday.

Richard Syron’s attorneys claim the suit is “fatally flawed” because there is no uniform definition of sub-prime mortgage, further contending there was “no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s guaranteed portfolio.”

Daniel Mudd, now chief executive of Fortress Investment Group, a major hedge fund, claimed the government “reviewed and approved the company’s disclosures during my tenure, and through the present,” he wrote. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless–so that it can sue individuals it fired years ago.”

Enrico Dallavecchia’s attorneys said that “Fannie Mae’s disclosures were vetted by its lawyers and approved by its regulators. They were truthful, accurate, and far more detailed than those issued by other financial institutions. While most in the market–including senior government officials–claimed that problems with subprime loans would be ‘contained,’ Mr. Dallavecchia warned that they could infect the entire housing market,” they added.

Thomas Lund’s attorney was equally defiant. “During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners. When the truth comes out at trial, it will be abundantly clear that Mr. Lund–who did not sell a single share of Fannie Mae stock during this entire period–acted appropriately at all times.”

Why isn’t the SEC suing Fannie and Freddie directly? Because the government-sponsored enterprises (GSEs) are essentially considered wards of the government, and the agency is content to have their cooperation in the case against these former executives. Both companies were seized by the government in 2008, wiping out all shareholders in the process, even as the Treasury Department received a 79.9 percent ownership stake in the firms. Since that time the government has spent more than $150 billion to keep both firms solvent.

Adding taxpayer insult to taxpayer injury, some of those funds have been allocated to paying for costs associated with Fannie and Freddie defending themselves. $50.1 million was spent for documentation relating to securities lawsuits and government investigations, while another $57.5 has been advanced to executives and board members for legal fees for the same two categories. That information was revealed to Congress by the Federal Housing Finance Agency (FHFA) earlier this year. This week it was revealed that the FHFA is still paying legal fees associated with the case.

Ironically, the charges were filed in the same federal court in Manhattan where federal judge Jed S. Rakoff rejected a $285 million settlement between the SEC and Citigroup. Rakoff was fed up with the SEC’s practice of allowing companies to settle cases without admitting any wrongdoing. Yet here we are all over again: six executives get sued while Fannie and Freddie are allowed to remain in the legal limbo, neither admitting nor denying liability.

Furthermore, even if the SEC’s prosecution is “successful,” as defined by their objectives to have each of these executives pay financial penalties, repay with interest any “ill-gotten gains,” and be banned from serving as an officer or director of any public company, only the last objective may actually be consequential. Unless the SEC can prove “willful misconduct or knowing violation of the criminal law,” director and officer insurance policies covering these executives will underwrite the monetary damages.

“A lot of these end up working into the D&O (directors and officers) insurance,” said Jacob Frenkel, former SEC enforcement attorney currently specializing in white-collar defense at Shulman Rogers in Potomac, Md. “The Commission is generally more interested in seeing the case resolved on its merits, not in allowing the source of settlement funds to drive the outcome.”

What merits? Freddie Mac CEO Richard Syron made $14.7 million in salary and bonus in 2006 and $18 million in 2007. By 2008 the company reported a $26 billion loss. Fannie Mae CEO Daniel Mudd made $10.7 million in bonuses in 2007, even as Fannie Mae was only months from insolvency. Freddie VP Patricia Cook pulled down $5 million in bonuses in 2006, a year before claiming Freddie Mac had “basically no exposure” to sub-prime mortgages. If executive insurance pays off all compensation clawed back by the SEC–including fines–a case “resolved” on such “merits” is laughable.

Yet such resolutions are hardly unique. Former Countrywide Financial Corp CEO Angelo Mozilo paid $67.5 million to settle an SEC lawsuit without admitting or denying guilt. Former Fannie CEO Franklin Raines paid $24.7 million also without admitting guilt for allegedly “manipulating earnings” from 1998-2004 that allowed him to make $91.1 million during the same period. And Fannie Mae itselfsettled a lawsuit in 2006, paying a $400 million fine–also “without admitting or denying the allegations.”

And despite judge Rakoff’s decision, essentially telling the SEC that such an odious status quo is no longer acceptable, here they go again. In fairness to the agency, they can only pursue civil litigation. Criminal litigation requires the Department of Justice (DOJ) to get involved.

Unfortunately, as has been reported here before, the DOJ isn’t interested in pursuing criminal charges, because proving “criminal intent,” highlighted by the acquittal of two Bear Stearns hedge fund managers in 2009, is too difficult. Hence the pursuit of civil litigation by the SEC.

As of now, one thing is certain: without being forced to admit guilt in civil settlements, along with knowing that criminal cases are all but certain not to be pursued, those involved in taking inordinate risk in pursuit of personal profit have virtually no incentive to be responsible.

It doesn’t take a business MBA to figure out a worst case scenario that includes no period of incarceration whatsoever, or even the admission of guilt, is a gilded invitation to roll the fiscal dice with impunity. Toss in the twin bonuses of insurance policies protecting ill-gotten gains–and taxpayer re-capitalization of bankrupt entities–and a highly disturbing question arises:

In the current environment, why aren’t more company officers taking even greater risks?